The liability cap you agreed at pilot scale
The number that looked generous on a trial is the number that decides the worst day at volume. Reading the cap, the carve-outs and the insurance together is what changes the answer.
Problems, in order · Part of Outsourced General Counsel
A liability cap agreed at pilot scale is usually set as a multiple of fees, so it tracks price rather than exposure. Dinmore Bell reads the cap, the carve-outs and the insurance limit as one question, and renegotiates the number at the next renewal rather than after an incident.
Most supplier agreements cap liability at a multiple of the fees paid in the preceding twelve months. On a pilot that produces a small, comfortable number attached to a small, comfortable contract. At volume the fees have grown, but so has everything the customer now runs through the thing you supply, and the two do not grow at the same rate.
The cap is the most consequential number in a commercial agreement. It is also the one most often agreed by people thinking about the deal rather than about the incident.
How much should a liability cap be?
There is no standard figure. A defensible cap is set against what the customer would lose if the supply failed, not against what the supplier is paid, and it is revisited whenever the contract changes scale.
Three shapes account for almost every cap in a commercial contract.
A multiple of fees. One hundred per cent of the charges paid in the preceding twelve months is the common starting point, sometimes 125 or 150 per cent. It is easy to agree because it is symmetrical and because both sides can calculate it. Its weakness is that it tracks price rather than exposure. A cheap component sitting inside an expensive process is capped at the price of the component.
A fixed sum. A stated figure, unconnected to the fees. This is the honest version where exposure is knowable: a defined number that both sides have actually thought about, rather than a formula that happens to produce one.
The insured amount. The cap is set at the limit of the supplier's own policy. Clean in principle, and it fails in the ways insurance fails: the policy has exclusions the contract does not, it renews annually on terms nobody rereads, and the aggregate limit is shared with every other customer who claims that year.
The problem with the first shape is not that it is wrong. It is that it was agreed when the contract was worth a fraction of what it is now worth, and nothing in the document made anybody revisit it.
What sits outside the cap?
Usually more than the supplier expects. Data protection breaches, IP infringement indemnities, confidentiality and, in many enterprise templates, anything described as a wilful breach are carved out of the cap and left unlimited.
A cap with wide carve-outs is a different instrument from the one the parties think they negotiated. The number at the front of the clause is doing very little if the categories most likely to produce a large claim have been lifted out of it.
Read the cap and the carve-outs as one sentence. The question to answer is not "what is our cap" but "what is our exposure on the three things most likely to go wrong, and is any of it capped at all".
The reverse also applies. A supplier who has accepted an uncapped IP indemnity has usually done so because the clause looked standard, not because anybody priced it. It is negotiable, and the most effective move is rarely to delete it. It is to cap the carve-out separately at a number that reflects what the risk is actually worth.
Can a cap be unenforceable?
Yes. Where one party contracts on the other's written standard terms, a clause restricting liability for breach only binds so far as it satisfies the statutory requirement of reasonableness, judged as at the date of the contract.
The Unfair Contract Terms Act 1977 sets the test, and it is worth reading in the original rather than in summary.
In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act, section 3 of the Misrepresentation Act 1967 and section 3 of the Misrepresentation Act (Northern Ireland) 1967 is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
Two things follow from those words that matter commercially.
The first is timing. Reasonableness is judged by what the parties knew when the contract was made, not by what the loss turned out to be. A cap that was reasonable against a pilot may be very hard to defend against a deployment the original document never contemplated, and the supplier does not get the benefit of the later, larger contract if nobody wrote one.
The second is that this is a test about the term, not about the outcome. It is won or lost on evidence of how the number was arrived at: whether it was negotiated, whether alternatives were offered at a different price, whether the customer had bargaining power. Suppliers who can show that a higher cap was available for a higher fee are in a materially better position than suppliers who cannot.
Separately, and regardless of what either party agreed, section 2 of the same Act prevents a term or notice from excluding or restricting liability for death or personal injury resulting from negligence. No commercial negotiation reaches that.
What changes between the pilot and the rollout
The trigger is almost never the contract. It is a fact about the business that the contract was not told about.
The pilot ran on one site and the rollout runs on forty. The product moved from reporting to control. The customer's own regulator started asking questions about the supply chain. Volumes doubled and the fee per unit fell, so the fee-multiple cap actually went down in real terms while the exposure went up.
Each of those is a moment to reopen the number, and each of them passes without anybody doing so, because the contract auto-renewed and the renewal was an administrative event rather than a commercial one. This is why Dinmore Bell holds caps, carve-outs, renewal dates and insurance limits in one register rather than in the contracts themselves: the clause that needs changing is never found by rereading the contract, it is found by somebody noticing that the business changed.
Insurance is the other half of the same exercise and is usually run by different people. The cap should sit inside the policy limit, the carve-outs should sit inside cover that actually responds to them, and the aggregate should be understood as shared rather than reserved. Where the contract promises more than the policy will pay, the difference is not a legal problem. It is a balance sheet problem.
What to do before the next renewal
Pull the five contracts that matter most by revenue and read only three things in each: the cap, the carve-outs, and the renewal or review date.
Then ask, for each, whether the number would still be agreed today by somebody looking at the current volume. Where it would not, the renewal is the cheapest moment to change it, because it is the only moment at which both sides expect to talk about the contract at all. Reopening a cap after an incident is a different conversation entirely, and the party asking is the party who has already lost the argument.
An outsourced General Counsel function does this as routine work rather than as a project. Dinmore Bell reads the estate, marks the contracts where the cap no longer matches the exposure, and takes the renegotiation at renewal under its own name.
Where a specialist is needed
Insurance placement and the terms of cover are a broker's work, not a legal one, and Dinmore Bell coordinates with the broker rather than substituting for them. Where a dispute reaches proceedings, litigation is conducted with instructed specialists. Tax treatment of a settlement is a question for the accountant, and the corporate structuring that decides which entity carries the risk in the first place is a separate exercise that is worth doing before the cap becomes the interesting question.
Common questions
- Is a liability cap of 100% of fees normal?
- It is the most common starting point in commercial supply agreements, and being common is not the same as being right. It ties the cap to what the supplier is paid rather than to what the customer would lose, so it fits a service whose price and importance rise together and fits badly where a low-cost input sits inside a high-value process.
- What is usually carved out of a liability cap?
- Data protection breaches, indemnities for intellectual property infringement, breach of confidentiality, and in many enterprise templates wilful default or fraud. Those categories sit outside the cap and are frequently unlimited, which means the headline number can be doing very little work on the risks most likely to produce a large claim.
- Can a supplier rely on a cap in its own standard terms?
- Only so far as the term satisfies the statutory requirement of reasonableness under the Unfair Contract Terms Act 1977, judged by the circumstances known to the parties when the contract was made. Evidence that a higher cap was offered at a higher price, or that the terms were genuinely negotiated, is what usually decides it.
- When should a liability cap be renegotiated?
- At the renewal that follows a change of scale: a rollout across more sites, a move from reporting to control, a new regulator taking an interest, or a volume deal that lowers the fee per unit. The renewal is the only moment at which both parties expect to discuss the contract, which makes it the cheapest moment to move the number.
- Can liability for personal injury be capped?
- No. Liability for death or personal injury resulting from negligence cannot be excluded or restricted by a contract term or a notice, whatever the parties agree. Caps operate on the commercial layer above that.
Sources
- 01section 2 of the same Act legislation.gov.uk
- 02Unfair Contract Terms Act 1977, s 11(1) legislation.gov.uk
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